I’m Professor and Chair of the Department of Economics at LIU Post in New York. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.

Wall Street Sell-off -- A Scary Chart

Was Wednesday’s Wall Street sell-off just noise or something more serious?

The most likely answer is that it is just noise, as data from one trade session do not set a trend.

But there was something about Wednesday’s Wall Street’s sell-off that looks scary to me: The sell-off extended across several asset categories. Precious metals and US Treasuries (NYSE:TLT) suffered the biggest losses, with SPDR Gold Shares (NYSE:GLD) down 1.94%, iShares Silver Trust (NYSE:SLV) down 1.10%, and iShares 20+ Year Treasury Bond down 0.78%.

Why is that scary?

Because it invokes thoughts of the 2008-9 financial crisis, whereby all major asset categories declined, and investors had nowhere to hide; and concerns about the nature of the prosperity that drives the ongoing bull market – the easy money policies of the Federal Reserve. That’s what’s behind soaring household wealth, not proliferation of new industries, rising labor force participation, or rapid growth in real personal income, as we wrote in a previous piece.

Wall Street thrives on prosperity. For a simple reason: prosperity creates both affluent consumers and affluent savers. They both provide fuel for bull markets. Affluent consumers drive the demand for goods and services that creates affluent companies and affluent shareholders. Affluent savers drive the demand for shares that pushes stock prices higher. And higher stock prices make affluent consumers and savers even more affluent, setting Wall Street into a virtuous cycle.

But there are two types of prosperity. First, there is real prosperity–created by growth in the real economy. The springing of new industries creates new job opportunities, and boosts labor force participation and real personal income. This in turn increases real wealth and equity prices, breeding more prosperity and higher equity prices as the virtuous cycle between a stronger real economy and stronger financial markets kicks in.

The late 1980s Wall Street bull market, for instance, was fueled by real prosperity driven by deregulation, globalization, and the proliferation of computer and biotechnology industries. The mid-1990s bull market (before it turned into a bubble) was propelled by real prosperity, driven by the spread of the Internet and telecom technologies.

Then there is paper prosperity–created by central bankers. This wealth is the outcome of a prolonged period of ultralow interest rates that inflate the asset prices which effect the wealth of the middle and upper class households, real estate, Treasuries, and equities, as was the case with the 2001-6 bull markets.

Similar to real prosperity, paper prosperity breeds more paper prosperity, as it creates wealthy consumers and savers, who help asset prices climb even higher.

But there is a big difference here. Paper prosperity rallies are in for a hard landing, as there is a gap between intrinsic asset prices and market asset prices that must be bridged with a sizable market correction.

A hard landing as was the case with the 2001-2006 real estate and equity rallies.

Will history repeat itself? We cannot say. Nonetheless, the parallels between today’s paper prosperity and that of 2001-6 are too similar to ignore; and today’s Wall Street action may serve as an awake up call.

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